Some Thoughts On The Music Business

Over the past week, I've had several conversations with friends in various parts of the music business and there are a number of recurring themes that I thought I'd blog about. This post is about the recorded music part of the business, not publishing, not touring, not movie or video game soundtracks.

Physical distribution (ie buying CDs in stores) is still more than 50% of the recorded music business but it won't be long before digital revenues will eclipse physical. It might happen this year. Physical revenues won't decline on a straight line. They will collapse at some point as retailers start to take away shelf space. Within five years, physical distribution will likely be history.

Digital distribution is largely files (mp3 and aac) sold via iTunes and to a lesser extent Amazon and a few others. Digital also includes streaming license revenues, both compulsory license revenue from Internet Radio (Pandora, radio.com, etc) and licenses from on demand services like Rhapsody, rdio, Spotify, Napster, etc.

Digital revenue today breaks down as 95% files, 5% streaming. And within the 95% that is files, iTunes is 80% or more. But iTunes is not growing that much. It was flat last year and is growing only slightly this year. Amazon is still growing nicely but from a much smaller base. File based digital revenues are maturing and are not likely to make up the loss in revenue from physical distribution.

Streaming is growing very nicely and has the potential to develop into a large business but the companies that provide streaming services are struggling under the weight of the license fees.

The average iTunes customer purchases music that generates roughly $50 to $60/year to the record companies after Apple takes its cut. So the record companies want to get $50 to $60/year from the on demand services. The on demand services have not been able to make that model work for them yet as it requires a $100 to $120/year subscription to breakeven. And worse, the record companies are reluctant to support freemium models out of fear that they canibalize file based revenues.

I've long said that music listening is going to move into the cloud and that the dominant model will be streaming via free ad supported Internet Radio and paid subscription services. If that is to come to pass, the record companies will need to take some risks to grow this market. Converting user behavior takes time and requires free trials, subsidized offers, and a concerted marketing effort by the entire industry.

I'd advise the record companies to partner with the innovators in the digital music sector, something that they have largely been unwilling to do as long as physical distribution pays the bills. But the end is near for CDs and iTunes isn't going to replace physical at the rate it is growing. So it is high time to invest to build the streaming market. And for the record companies, that investment means subsidies and attractive license terms so that innovators can profitably build the services of the future. You have to invest in new businesses to grow them. That's what I do all day long. And I'd love to see the music industry do the same.